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Will the New Congress Change the Tax Code?

‘If I could make just one change in Washington, it would be to fix the tax code, ‘ says Rep. Paul Ryan (R., Wis.), who could be future chairman of the House Ways and Means Committee.
Kenosha News/Associated Press

For business, the most important postelection question is simple: Will there be corporate-tax reform or not?

President
Barack Obama
wants it. Republicans want it. And businesses—which have no small influence in Washington—very much want it.

That’s why top lawmakers in Washington are talking about a nine-month “window” to make a deal. The nine months is a political marker, the interval in which both sides might have at least some repose before the tumult of the 2016 election begins.

Listen to the words of
Paul Ryan,
who just might be the future chairman of the House Ways and Means Committee: “If I could make just one change in Washington, it would be to fix the tax code.”

Yet, like most things in D.C., platitudes don’t make policy.

Republicans are attached to “comprehensive tax reform” which typically means overhauling much of the approach to personal taxes, including those for small business.

For Democrats this amounts to tax cuts for the wealthy, a nonstarter.

Expect Democrats to be focused on the ever-divisive question of “territoriality,” another way of saying that overseas profits are taxed in their country of origin, not by the U.S.

And what of compromise? Well, that’s been available for years, via a plan sponsored by current Ways and Means Chairman David Camp. If both sides wanted a deal, they had a path. But, like most things in Washington, that never happened either.

Which brings us back to American business. Chief executives have been consistently pressing for change, especially in light of the corporate “inversions” that are relocating U.S. companies—and their tax dollars—abroad.

They rightfully point out that inversions are a symptom, not a cause, of a system that encourages overseas profits never to make their way back home.

“Comprehensive tax reform and comprehensive immigration reform. I mean, I’m telling you, if we can get those two things right, given the momentum that’s behind this economy, and get the regulators out of the way, or at least not creating new obstacles, the American economy will be on fire again. I am so optimistic that—well, I’m not optimistic,” a somewhat flummoxed
David Seaton
said last week on his quarterly earnings call. Mr. Seaton is CEO of
Fluor Corp.

The thought in Washington is that inversions might finally force change. But why would Republicans compromise now if they might control the White House in two more years? Would left-leaning Democrats concede ground to enhance the legacy of an unpopular president? And would businesses let nearly three decades of special breaks simply disappear without a fight?

The odds of tax reform could well increase if the Republicans take the Senate. “That moves the game from whether Congress could produce a unified proposal to whether Congress and the president are interested in striking a bargain,” says
Linda Swartz,
who chairs the tax group at law firm Cadwalader.

“I suspect the president is, and the Senate is. I’m less certain whether the Senate can deliver the House.”

If you are inside a company, staring at a 2016 planning spreadsheet, here is some advice: Don’t change those tax assumptions. Grind on, while Washington wails in the distance.